Clawing back contributions – Bankrupt Estates: Superannuation Edition

Prior to declaring bankruptcy, an individual may transfer funds to a regulated superannuation fund to avoid those monies being caught by the hands of a creditor. However, there is potential for those transactions to be considered void pursuant to the Bankruptcy Act 1966 (Cth) (the Act), such that the trustee in bankruptcy may ‘claw back’ the funds for the benefit of and to be distributed amongst creditors.

Voidable superannuation contributions

Section 128B of the Act deals with superannuation contributions made to defeat creditors. The main points are as follows:

• Transfers that are void: A transfer made by a person who later becomes bankrupt is void as against the trustee in bankruptcy in the transferor’s bankruptcy if the transfer is made by way of a contribution to an eligible superannuation plan.
• Conditions for void transfers: The property transferred would likely have become part of the transferor’s estate or been available to creditors if the property had not been transferred and the main purpose in making the transfer was to prevent the transferred property from becoming divisible among the transferor’s creditors.
• Showing the transferor’s main purpose: The transferor’s main purpose in making the transfer is taken to be the purpose described above if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.
• Rebuttable presumption of insolvency: A rebuttable presumption arises that the transferor was, or was about to become, insolvent at the time of the transfer if it is established that the transferor had not kept such books, accounts, and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor’s business transactions and financial position.

Section 128B(3) of the Act provides that the court must consider whether the transferor had created a pattern of contributions to a fund such that the specific transactions when considered in light of that pattern, are out of character. The Court then considers this pattern to when determining whether the transactions were made during or prior to the transferor becoming insolvent.

If the payment is deemed to be void under section 128B of the Act, the trustee in bankruptcy can issue a notice under section 128E of the Act to place a freeze on the superannuation fund to prevent any dealings with the fund.  The trustee in bankruptcy can then take steps to recover the void transactions by either:

1. Requesting AFSA to issue a section 139ZQ notice to require the superannuation fund to pay the trustee in bankruptcy; or
2. Obtain a court order under section 139ZU of the Act,

The decision in Sijabat

In the case of Do (Trustees), in the matter of Andrew Superannuation Fund v Sijabat [2023] FCAFC 6 (Sijabat) the Court was tasked with considering the issues of protected assets and void transactions pursuant to superannuation fund contributions.

In Sijabat, the Full Court of the Federal Court concluded that the transfers were not out of character finding that they had been occurring as a pattern over the course of 6 years. The court overturned part of the orders made in the court below, meaning that the superannuation contributions were not void and were able to remain in the fund so that the only transactions considered void were those contributions made in the financial years ended 30 June 2014 and 30 June 2015 – which were considerably lower than the contributions made in the years preceding them.

The appellant and bankrupt, Mr Do, argued that at the time of each of the transfers made in the 2013 financial year, he had no personal debts because at the relevant times no claim had been made by the petitioning creditor. Further, he argued that the evidence established that he was solvent at the time of each of the contributions, rebutting the presumption of insolvency provided for in section 128B(5) of the Act.

Key takeaways

The Full Court’s decision in Sijabat is the first appellate decision in Australia to consider s 128B(5) of the Act.

The decision sheds light on the treatment of superannuation contributions made prior to the sequestration in bankruptcy of an individual’s estate. It also provides that in some circumstances, the trustees in bankruptcy will be left to pay the costs of a bankrupt’s appeal proceedings, as was the case for the trustees of Mr Do’s bankrupt estate.

The decision in Sijabat is a reminder to both trustees in bankruptcy and individuals facing bankruptcy that superannuation contributions made prior to bankruptcy may be void against the trustee and may result in those transactions being clawed back into the bankrupt estate.

Contributors

Dylan Zhu, Senior Associate

Samantha Jack, Lawyer